Arlington, Va. — The U.S. manufacturing sector is showing incremental improvement with only a few potential speed bumps in the near-term, according to the quarterly Manufacturers Alliance for Productivity and Innovation (MAPI) MAPI Business Outlook.

The survey’s composite index is a leading indicator for the manufacturing sector. The December 2013 composite index improved to 67 from 66 in the September survey—the fourth straight quarterly advance and the highest level since the September 2011 reading of 67. For 17 quarters, the index has remained above the threshold of 50, the dividing line separating contraction and expansion.

“This quarter’s survey results build on the gains of the previous survey,” noted Donald A. Norman, Ph.D., MAPI senior economist and survey coordinator. “The increase in the composite index and the continued improvement in most individual indexes signal that there is momentum pushing manufacturing activity and that activity is expected to increase over the next three to six months. The results suggest the sector has reason for optimism for all of 2014.”

The Composite Business Outlook Index is based on a weighted sum of the Prospective U.S. Shipments, Backlog Orders, Inventory, and Profit Margin Indexes. The views of 46 senior financial executives representing a broad range of manufacturing industries are distilled into 13 individual indexes split between current business conditions and forward looking prospects. Of those 13 indexes, 9 increased and 4 declined.

Current Business Condition Indexes

The Inventory Index, based on a comparison of inventory levels in the fourth quarter of 2013 with those in the fourth quarter of 2012, increased to 61 in December from 49 in September. The upward trend is consistent with recent national income data and indicates an inventory build.

The Export Orders Index, which compares anticipated exports in the fourth quarter of 2013 with those of one year prior, rose to 67 from 61. The Backlog Orders Index rose to 64 from 59.

Companies are clearly seeing advances on the ledger sheet, since the Profit Margin Index increased to 72 in December from 68 in September. The Current Orders Index, a comparison of expected orders in the fourth quarter of 2013 with the fourth quarter of 2012, moved up to 72 from 70 in the previous report.

The Capacity Utilization Index, which measures the percentage of firms operating above 85 percent of capacity, was the lone current conditions index to experience a drop, falling to 27.3 percent in December from 30.0 percent in September; its long-term average is 32.0 percent.

Forward Looking Indexes

The Annual Orders Index, which is based on a comparison of expected orders for all of 2014 with orders in 2013, was a bright spot, increasing to an impressive 86 in December from 81 in September.

The Prospective U.S. Shipments Index, which reflects expectations for first quarter 2014 shipments compared with those in the first quarter of 2013, increased to 79 in the current survey from 76 in September. The Prospective Non-U.S. Shipments Index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms for the same period, advanced to 72 in December from 70 in the previous report.

The U.S. Investment Index is based on executives’ expectations regarding domestic capital investment for 2014 compared to 2013. The index was 54 in December, a slight increase from 53 in September. The Non-U.S. Investment Index, however, dropped significantly, to 41 in the current survey from 54 in September.

“The sharp drop in the Non-U.S. Investment Index likely reflects concerns about economic conditions in parts of the Eurozone and Latin America, as well as the rising cost of operations in China,” Norman explained.

The Interest Rate Expectations Index fell to 70 from 71, indicating that fewer respondents believe that longer-term interest rates will rise by the end of the first quarter of 2014.

The Research and Development Spending Index also softened, decreasing to 61 in December from 66 in September; this index compares anticipated spending for the years 2013 and 2014.

In a supplemental section, participants were queried on the staffing of the finance function.

While 41 percent of the survey respondents indicated they will lose 5 percent or less of their finance staff over the next three years, 30 percent anticipate that 11 percent or more of their finance staff will depart or retire over that period.

Seventy-one percent said it will be moderately difficult to replace departing financial personnel, and 76 percent report using search firms as part of recruiting. Financial analysts and tax specialists are the most difficult positions to fill.

MAPI’s Composite Business Outlook Index is a historically accurate near-term preview of business prospects for the manufacturing sector and is a leading indicator of the Federal Reserve’s industrial production index.

The Manufacturers Alliance for Productivity and Innovation (MAPI), founded in 1933, contributes to the competitiveness of U.S. manufacturing by providing economic research, professional development, and an independent, expert source of manufacturing information. Learn more at www.mapi.net.